Owners get squeezed

It's been four years since Doreen Zayer raised prices at Relax on Cloud Nine—her 14-employee massage, yoga and spa studio on Staten Island—even though she's facing rising costs for overhead.

She says her largely middle-class clients simply don't have the discretionary income they once did to treat themselves, so they're doing things like stretching out the time in between visits and aggressively looking for special deals whenever possible. That's true even when they get massages to reduce pain.

"There's cautiousness about spending money now," said Ms. Zayer. "People are looking for value these days because they're feeling squeezed."

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As a result, the studio—which charges $15 for a drop-in yoga class and $45 for a half-hour "mini-facial"—has little choice but to absorb the rising tab for real estate taxes and electricity, among other expenses. That isn't easy: Ms. Zayer's operating costs are up around 10% from about two years ago, despite her closing one of her stores in 2010 as well as shuttering a mobile unit used at events such as golf outings.

With "under $1 million" in annual revenue, the company is barely breaking even. Ms. Zayer has tried to increase sales, adding acupuncture and more yoga to her offerings about six months ago. That has helped, but not enough to offset the hit it has taken since the recession. "The last couple of years, we've just been covering our butts," she said.

Ms. Zayer is hardly alone. Like many small business owners in New York City who serve a largely middle-class customer base, she's experiencing the effects of today's economic pinch. The fact is, members of this target market are struggling financially as the costs they must pay for everything from groceries to rent to education are rising. The consumer price index for food prepared at home, for example, rose 3.9% from February to April alone, driven by steep increases in costs for staples such as meats, poultry and eggs.

Meanwhile, as in the nation as a whole, median household income in the New York area has declined recently. As a result, these consumers are watching their pennies—and the companies serving them are feeling it. "The middle-class income squeeze is definitely hurting small businesses," said Bruce Bachenheimer, clinical professor of management and director of the Entrepreneurship Lab at Pace University.

The situation is particularly acute in New York. "Because of the high cost of living in general in New York, you see these pressures on the middle class even more," said Mr. Bachenheimer.

Just look at housing costs. The average rent in the city, excluding Staten Island, rose 1% from the first to second quarters of 2013, to $3,017, considerably more than the national average of $1,062, according to Reis, a real estate research firm.

No relief in sight

Worse, economists and business experts say the middle class isn't likely to feel relief anytime soon because of such factors as stepped-up global competition and an increasing tax burden. Small businesses that cater to middle-income customers are having trouble turning a profit as a result.

"Small businesses are struggling with lower demand and the expectation of greater value while their rent and other costs aren't going down proportionally," said Jeffrey Carr, clinical professor of marketing and entrepreneurship at New York University Stern School of Business. In addition, though the growth of Groupon-like sites has slowed, consumers have now come to expect deals and price reductions. The upshot: "This may be the new normal for some time to come," said Mr. Carr.

Certainly, not every small business with a middle-class customer base has felt the pinch. That's especially true for companies with services and products that help consumers stretch their dollars or avoid big purchases, such as auto-body repair shops and quick-serve restaurants.

"I see some of these businesses doing really strong volume," said Stephen Sheinbaum, CEO of Manhattan-based Merchant Cash and Capital, which provides alternative financing to small businesses.

Still, many small business patrons are spending less. That's the case at Schatz Steinway, a 118-year-old family-owned seller of paint, wallpaper and window treatments in Astoria, Queens. Thanks to slow demand, the eight-employee company has not been profitable for the past two years, according to owner Richard Plush, who declined to provide information on the shop's revenue. Even business on Saturdays, once prime time, has slacked off. "People used to line up," he said.

According to Mr. Plush, more customers also are choosing to repair such products as blinds, rather than replace them, which hurts his sales of these items. In response, about seven months ago, Mr. Plush reduced store hours to one late night a week from two.

In some cases, businesses have tried to cope by adding new products or services. Two years ago, Linda Vinciguerra, owner of Linda Lingerie Boutique on Staten Island, started selling more products for men. Still, the company, which has "under $1 million" in revenue, is not profitable. "I'm paying my bills, but I'm not getting a salary," she said.

Slow demand

What's more, for business owners like Dan Scaglione, a partner in Scaglione Brothers Bakery in the Morris Park section of the Bronx, it is hard to invest in expansion. Nine years ago, he added a deli to the enterprise, which was started in 1944 by his grandfather. It contributes most of his annual revenue of less than $1 million, according to Mr. Scaglione. Even so, he's seen demand slow down and is loath to raise prices for fear of scaring off patrons.

He'd like to add other revenue streams, but hesitates.

"The stuff we sell is mostly perishable. It can't sit on the shelf for three weeks," he said.

Against this backdrop, pretax profit margins are approximately half what they were about six years ago. "If we didn't own the building, we would have closed up by now," he said.

Established businesses aren't the only ones that are finding it hard to attract the middle-class consumers they are targeting, even when they are focused on those with a bit of discretionary income.

Darren Carbone, who owns a LaVida Massage franchise on Staten Island with 12 employees, has been luckier than some. In business for just 16 months, "we didn't get the boom I thought we'd see this past Christmas," he said. Still, demand has been increasing steadily. "We're up week to week, quarter to quarter," said Mr. Carbone, whose business took about 15 months to break even. "But it's slower growth than I'd expected."

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